Is HSA health insurance? We Know

5 min read • November 10, 2018

30 sec brief

Quick answer – no it isn’t. Health insurance is provided by an insurance company who you pay monthly premiums to. If something bad happens and you need to visit the hospital, they help you pay your health care costs. The Health Savings Account (HSA) is not a health plan. It’s a tax-free savings account designed to help you pay for the out of pocket health care expenses associated...

Quick answer – no it isn’t.

Health insurance is provided by an insurance company who you pay monthly premiums to. If something bad happens and you need to visit the hospital, they help you pay your health care costs.

The Health Savings Account (HSA) is not a health plan. It’s a tax-free savings account designed to help you pay for the out of pocket health care expenses associated with high deductible health plans. (More on that later).

With that out of the way, let’s dive into why the HSA may be useful to you.

A Story About Deductibles and Medical Bills

Let’s say you have a health care plan from your employer which has a $2500 deductible. (For the sake of this example we’ll ignore coinsurance and out of pocket limits).

That means if you break your arm and the bill for your medical care is $300, you have to pay for that out of your own pocket. Because you’re careless, you break your knee a month later. Your medical costs are $500. You will still have to pay for that out of your own pocket.

But three months later your carelessness goes too far. You hit your head and your doctor wants you to have an MRI scan. Your bill is $2200. Do you have to pay for all of that?

No, you don’t. Let’s tally your costs so far.

Broken arm = $300

Broken leg = $500

So far then you’ve spent $800.

Your deductible was $2500. Therefore, the amount remaining on your deductible is $2500 minus $800, which is $1700.

This means for your MRI scan, you’ll have to cough up $1700, while your insurance provider will pay the remaining $500.

If you get into any accidents for the rest of the year, your insurance provider will pay for all of it, as you’ve gone over your deductible.

How an HSA is Useful

That example was important to illustrate the impact of out of pocket health care expenses. Even with health care, you still need to pay a chunk of change when you go to the hospital.

There are two ways around this.

You can get a health care plan that has high premiums but a low deductible.

Or you can save up money with your high deductible plan – like the example above – so that in an emergency, when you get a hefty medical bill, you’re not put out on the street.

Here’s an example comparing a traditional low deductible plan with a high deductible plan.

Traditional Low Deductible Plan

High Deductible Plan

Deductible

$400

$3100

Annual premium

$2700

$800

Co-insurance after deductible

10%

10%

Out-of-pocket maximium

$2500

$5200

Employer contribution to HSA

Zero

$1600

If you’re a bit confused about what these terms are, or how they all fit together, we explain them and talk more about how co-insurance and deductibles work here.

An HSA is set up to help you with the high deductible option. It’s a savings account that helps reduce your taxable income and save on your income tax. You can only spend it on qualified medical expenses.

If you don’t spend any of the money on health care, you can withdraw it tax-free when you retire later in life.

In our example you can see that a benefit of a high deductible plan is that your employer helps out. The tax-free contribution from your workplace could make the high-deductible plan worthwhile. Only if you are willing to tolerate the risk of forking out a chunk of change if you fall ill.

Remember your healthcare provider will only start helping with your bills after you’ve paid up to your deductible.

We talk more about the tax advantages of the HSA here.

If HSA Isn’t Health Insurance Then What Health Plan Options Do I Have?

If the HSA isn’t health insurance, then what are your health insurance options?

Your first stop for health insurance is to see what you can get through your employer. Only if you can’t get health insurance through your employer should you look through the Affordable Care Act marketplace.

Whichever marketplace you look through you’ll need to wade through a string of alphabets to determine the type of health insurance plan that is right for you.

Pay attention to whether the plan is a high deductible and low premium plan (HDHP) or a low deductible and high premiums plan. This will affect whether you can get an HSA.

For 2019 the IRS states that health care plans that have a minimum deductible of $1350 and an out-of-pocket maximum of $6750, for individuals can have an HSA. For families, these figures rise to $2700 and $13500 respectively.

If you can’t get an HSA, you may want to look into a Flexible Spending Account (FSA). It allows you to save for health expenses, but you will have to spend all your contributions in the year. No rollover, no tax free interest, no backup retirement fund.

What Can You Spend Your HSA on

HSAs have tax advantages.

Your HSA contributions are tax-deductible from your income tax, meaning you can lower your tax burden.

The interest you earn on your HSA is tax-deferred, meaning you can grow your savings into a healthy pot for when you retire.

If you set up your HSA account with a financial institution that allows you to invest your contributions in mutual funds, then the dividends you get are also tax-deferred.

You can withdraw from your HSA to spend on qualified medical expenses without paying tax.

You can spend your HSA contributions not only on your deductible, copay, and coinsurance when you visit the hospital but also on health care expenses like dental care, prescription drugs, long-term care, preventive care programs etc.

However, you can’t spend your HSA on your insurance premiums.

For more examples of what you can and can’t spend your HSA on, look at IRS publication 502 or talk to your tax advisor.

Some HSA providers provide you with a special debit card that will only work when you purchase qualified medical expenses. Any other type of purchase and the payment won’t go through.

Other HSA accounts have an HSA custodian who determines if your expenses qualify. In order to use your HSA funds you first have to pay for them out of your own pocket, and then reclaim your expenses from your HSA fund. Be sure to check this ahead of time.

In Closing

While an HSA is not a form of health insurance, it is very useful in not just helping you save for out of pocket medical expenses, but as a supplemental retirement fund. Things like your flexibility in contributing, the ability to keep your unused balance and additional tax benefits make HSAs a wise choice. So sign up for an HSA – it’s free →